Jonathan R. Macey, a
Yale University academic, in a provocative, well-written and compact new book wonders what happened to reputational capital, which once played a vital role in “fostering the high-trust environment critical to the successful operation of capital markets and corporate financing transactions” and protecting market participants. His answer: Regulation.

“The Death of Corporate Reputation: How Integrity Has Been Destroyed on Wall Street,” published by Pearson Education Inc., describes with lots of real examples and keen insight how regulation supplanted reputation to undermine the capital markets.

As Mr. Macey writes, “there has been a collapse of demand in the market for reputation ... (in) countries like the United States that increasingly rely on regulation rather than reputation to protect market participants from fraud and other forms of abuse.” Financial companies in those markets ”have weak incentives to invest in developing and maintaining their reputations.”

In his book, Mr. Macey, the Sam Harris Professor of Corporate Law, Corporate Finance and Securities Law, who also teaches at the Yale School of Management, describes how reputation of individuals at a company, once linked, have become “distinct” or “unhinged” from firm reputation. “Hardly anybody goes down with the ship” now, he writes.

His solution: Deregulation, coupled with redirecting regulators to focus on how regulation can help improve or weaken reputations.

This article originally appeared in the May 13, 2013 print issue as, "Yale professor: Regulation to blame for loss of integrity on Wall Street".